The ITC eChoupal Initiative
Group 6
AFP09
IIM A
The e-Choupal model of ITC is an example of what a large corporation can combine a social mission and
an ambitious commercial venture and how it can play a major role in rationalizing markets and
increasing the efficiency of an agricultural system and do so in ways that benefit farmers and rural
communities as well as company shareholders. ITC’s example also shows the key role of information
technology used by local farmers in helping to bring about transparency, to increase access to
information, and to catalyze rural transformation, while enabling efficiencies and low cost distribution
that make the system profitable and sustainable. Critical factors in the apparent success of the venture
are ITC’s extensive knowledge of agriculture, the effort ITC has made to retain many aspects of the
existing production system, including retaining the integral importance of local partners, the company’s
commitment to transparency, and the respect and fairness with which both farmers and local partners
are treated.
1. EVALUATION OF THE CONTEXT FOR FUNCTIONING OF E-CHOUPAL:
HOW IS IT DIFFERENT FROM A MORE “DEVELOPED” WORLD
The context of ITC’s eChoupal in India is different from a more developed world in many ways. They are:
The business model
A pure trading model does not require much capital investment. The e-Choupal model, in contrast, has
required that ITC make significant investments to create and maintain its own IT network in rural India
and to identify and train a local farmer to manage each e-Choupal. The computer, typically housed in
the farmer’s house, is linked to the Internet via phone lines or, increasingly, by a VSAT connection, and
serves an average of 600 farmers in 10 surrounding villages within about a five kilometer radius. Each e-
Choupal costs between US$3,000 and US$6,000 to set up and about US$100 per year to maintain. Using
the system costs farmers nothing, but the host farmer, called a sanchalak, incurs some operating costs
and is obligated by a public oath to serve the entire community; the sanchalak benefits from increased
prestige and a commission paid him for all e-Choupal transactions. The farmers can use the computer to
access daily closing prices on local mandis, as well as to track global price trends or find information
about new farming techniques—either directly or, because many farmers are illiterate, via the
sanchalak.
They also use the e-Choupal to order seed, fertilizer, and other products such as consumer goods from
ITC or its partners, at prices lower than those available from village traders; the sanchalak typically
aggregates the village demand for these products and transmits the order to an ITC representative. At
harvest time, ITC offers to buy the crop directly from any farmer at the previous day’s closing price; the
farmer then transports his crop to an ITC processing center, where the crop is weighed electronically
and assessed for quality. The farmer is then paid for the crop and a transport fee. “Bonus points,” which
are exchangeable for products that ITC sells, are given for crops with quality above the norm. In this
way, the e-Choupal system bypasses the government-mandated trading mandis.
An IT-Driven Solution
From the conception of the model, an IT-based solution was recognized as fundamental to optimizing
effectiveness, scalability, and cost. The two goals envisioned for IT are:
• Delivery of real-time information independent of the transaction. In the mandi system, delivery,
pricing, and sales happen simultaneously, thus binding the farmer to an agent. E-Choupal was seen asa
medium of delivering critical market information independent of the mandi, thus allowing the farmer an
empowered choice of where and when to sell his crop.
• Facilitate collaboration between the many parties required to fulfill the spectrum of farmer needs. As
a communication mechanism, this goal is related to the commitment to address the whole system, not
just a part of the system.
It should be noted that ITC did not hesitate to install expensive IT infrastructure in places where most
people would be wary of visiting overnight. It is a manifestation of the integrity of rural value systems
that not a single case of theft, misappropriation, or misuse has been reported among the almost 2,000
e-Choupals.
2. ROLE OF DIFFERENT MARKET PLAYERS IN E-CHOUPAL
Risk Assessment and Mitigation
ITC identified the following risks as it designed the business model:
• Radical shifts in computing access will break community-based business models.
• The sanchalaks are ITC’s partners in the community, and as their power and numbers increase, thereis
a threat of unionization and rent extraction.
• The scope of the operation: the diversity of activities required of every operative and the speed of
expansion create real threats to efficient management.
Managing Bureaucracy
When the e-Choupals were conceived, they faced a fundamental regulatory obstacle. The Agricultural
Produce Marketing Act, under whose aegis mandis were established, prohibits procurements outside
the mandi. ITC convinced the government that e-Choupals would operate according to the spirit of the
Act and thus e-Choupal procurement was in line with its goals. Since ITC would not be using the mandi
infrastructure for its procurement, and would have to incur its own costs with the e-Choupal
infrastructure, the government offered to waive the mandi tax on the produce procured through the e-
Choupal. However, ITC recognized that the tax was a major source of revenue for the government and
local mandis and, as ITC’s competition was also subject to the tax, the tax itself was not making ITC
uncompetitive. ITC therefore chose to continue paying the tax rather than risking the relationships with
the government and the mandis.
Managing functionaries of eChoupal system
The critical element of the e-Choupal system, and the key to managing the geographical and cultural
breadth of ITC’s network, is the sanchalak. ITC channels virtually all its communication through the local
sanchalak. Recruiting a local farmer from the community for this role serves several purposes:
• For generations, the Indian farmer has been betrayed by individuals and institutions. Trust is the most
valuable commodity in rural India. No transaction will happen without trust, irrespective of the strength
of the contract. The sanchalak is selected to provide this vital component in ITC’s system.
• ITC need not invest in building and securing a physical infrastructure such as a kiosk for housing the e-
Choupal computer.
• The sanchalak is trained in computer operation and can act as a familiar and approachable human
interface for the often illiterate farmers and other villagers.
• ITC expects to leverage the profit-making power of the small-scale entrepreneur.
The Commission agent
Since the e-Choupal system by-passes the agent-controlled mandis and has considerably reduced
commission income, why do agents agree to cooperate with ITC. First, the company has made it clear
that they will continue to buy produce through the mandis. Second, the company offers significant
commissions for samyojak services. Finally, the agents are fragmented and fear that if they do not agree
to work with ITC, another agent will gain the promised e-Choupal revenues.
Sustaining Commercial Volume
“Virtual vertical integration” can only work if there is a continuous flow of information between the e-
Choupals and ITC. Because of the number and physical dispersion of the e-Choupals, this communication
must be initiated by the sanchalaks. If their motivation to communicate with ITC diminishes, the channel
will still function for procurement, but will lack the vitality to supply risk management, distribution, or
product design. Maintaining continuous commercial flow keeps the sanchalak motivated to spend time
and money calling the ITC representative to ask about new products, convey village demand, and
providing ITC with local updates. An example of the power of local information was seen early in e-
Choupal implementation. A competitor attempted to divert produce coming to the ITC factories by
stationing representatives on the roads leading up to the plant. This person would stop farmers on their
way to the ITC hub and offer them a price higher than the ITC rate at the competitor’s plants. Farmers
alerted the sanchalaks and they in turn provided ITC with the information necessary to address the
situation. Sanchalaks thus provide an essential role in the chain of communication.
Technology: Characteristics of the Operating Environment
Understanding the constraints imposed by the physical and social environment in e-Choupals operate is
necessary to provide the context for understanding the system design.
(a) Overcoming Power Constraints
Power availability in rural India is unreliable and the quality of power is sub-standard. As power is
usually available for only a few hours a day and at on a sporadic schedule, the e-Choupal computer
cannot always be accessed when information is needed. Access to information in a timely manner is
critical to the success of the business model. ITC has overcome the problem of local power supply by
providing a battery-based UPS (uninterrupted power supply) backup. With the reliability of a battery
backup, the sanchalak can use the system at least twice a day—in the morning to check the prevailing
mandi prices, and again in the evening to check the rate ITC is offering the next day. While the battery
backup addresses the power supply issue, insufficient line power during the day poses the challenge of
not having enough power to charge the backup battery. This has caused ITC to explore other power
sources and ultimately ITC decided to use solar battery chargers. One full day of sunlight is enough to
charge the battery for 70 to 80 minutes of computer usage.
The second problem with power is quality. Voltage fluctuations are endemic. The UPS unit is the most
affected component. As a result of the erratic power supply, fuses are susceptible to being blown. To
overcome this problem, ITC plans to install specially designed UPS units that remain effective between
90V and 300V. In order to control voltage spikes, they have introduced spike suppressors and filters.
Phase imbalances, which lead to damage of equipment, have been addressed through the use of
isolation transformers to correct neutral voltages.
Transportation
Most e-Choupal villages lack proper roads, limiting vehicle access. As such, public transportation access
to many of the villages is infrequent. Some villages are served only once or twice a day by rural taxis.
The population relies on two-wheeled bicycles and motorbikes and bullock carts as the main means of
transportation. Moving equipment into and out of the villages is not an easy task. Providing system
support and maintenance requires the technician to travel from outside areas to visit the e-Choupal. For
these, and other reasons ITC initially placed e-Choupals in villages that are within a ten to fifteen
kilometer radius of a city.
Telecom Infrastructure
Telecommunication infrastructure in villages is poor. Telephone exchanges are subject to sporadic
power supply and have limited battery backup. When power is lost, phones cease to function. In
addition, there is no local support staff to maintain or troubleshoot telephone exchanges. The support
team at the main exchange typically is responsible for eight to ten villages and is short-staffed. The turn-
around time for fixing problems is often measured in days, not hours. Overhead telephone lines are
exposed to the elements and run alongside high voltage power lines which can cause transmission
quality problems.
3. MARKETING IMPLECATIONS FOR ITC
DEVELOPMENT BENEFIT
The e-Choupal system gives farmers more control over their choices, a higher profit margin on their
crops, and access to information that improves their productivity. By providing a more transparent
process and empowering local people as key nodes in the system, ITC increases trust and fairness. The
increased efficiencies and potential for improving crop quality contribute to making Indian agriculture
more competitive. Despite difficulties from undependable phone and electric power infrastructure that
sometimes limit hours of use, the system also links farmers and their families to the world. Some
sanchalaks track futures prices on the Chicago Board of Trade as well as local mandi prices, and village
children have used the computers for schoolwork, games, and to obtain and print out their academic
test results. The result is a significant step toward rural development.
KEY LESSONS
The e-Choupal model demonstrates that a large corporation can play a major role in recognizing markets
and increasing the efficiency of an agricultural system, while doing so in ways that benefit farmers and
rural communities as well as shareholders. The case also shows the key role of information technology—
in this case provided and maintained by a corporation, but used by local farmers—in helping bring about
transparency, increased access to information, and rural transformation. Critical factors in the apparent
success of the venture are ITC’s extensive knowledge of agriculture, the effort ITC has made to retain
many aspects of the existing production system, including maintenance of local partners, the company’s
commitment to transparency, and the respect and fairness with which both farmers and local partners
treated.
ITC Gains
While retaining commissions paid for the sanchalaks’ services, the 0.5% commission paid to them is
significantly less than the costs associated with the mandi system. Direct reimbursement of transport
costs to the farmer is estimated to be half of what ITC used to pay the commission agents for transport
to their factory. Removal of intermediary manipulation of quality and the ability to directly educate and
reward quality in the customer base results in higher levels of quality in e-Choupal procurement. This
results in higher oil yields, which, in turn, lead to higher profits for ITC.
E-Choupal also allows ITC to develop long-term supplier relationships with farmers and attain some
degree of supply security over time. Risk is also managed in the e-Choupal system by a far stronger
information infrastructure. Sanchalaks and samyojaks working on behalf of ITC provide excellent
bottom-up information on pricing, product quality, soil conditions, and expected yields. This allows ITC
to better plan future operations.
Additional Services: Credit and Insurance
Farmers’ low income and difficulty in accessing credit severely limits their capacity to pursue
opportunities within and outside the agriculture sector. Access to credit has long been considered a
major poverty alleviation strategy in India.
Many financial institutions are hesitant to serve rural India due to lack of credit history, high delivery,
transaction, and administration costs, and a perception of high risk that leads to high borrowing costs
imposed on farmers. ITC proposes to address these problems through e-Choupals and partnerships with
financial institutions to capture needed information and offer new products:
• Capturing Credit History. Farmers in rural India borrow money from local moneylenders, through
government incentives, friends, relatives, or traders. Local moneylenders and intermediates are aware
of farmers’ creditworthiness and are therefore willing to loan money, although at a high interest rate.
Through e-Choupal, ITC now has the capability to manage credit risk through its sanchalak network
which can be used not only to verify creditworthiness of individual farmers but also to continuously
monitor credit risk. ITC will be able to create a consolidated farmers’ database with information
pertaining to their holdings and transactions that can be used as a source of credit report profiles.
• Transaction and Administration Costs. For major financial institutions, transaction costs involved in
servicing the rural market have been high because of the difficulty in reaching the market. EChoupal can
help overcome this problem by leveraging the IT infrastructure and the sanchalak network, thereby
lowering administrative costs. ITC can plan partnership with larger banks such as ICICI to design products
for rural India.
• Non-cash loans for farm inputs. Instead of giving cash to the farmer directly, the financial institutions
will purchase farm inputs on behalf of the farmer. Farmers are expected to pay back loans for the
purchase price to the financial institution.
• Loans to sanchalaks. Instead of giving loans directly to farmers, loans will be given to sanchalaks who,
in turn, will loan money to farmers. Sanchalask can manage credit risk better than financial institution
because they have better access to the farmer, and therefore more accurate information.
• Direct loans to farmers based on sanchalak recommendations. In this case, sanchalaks’ commissions
are based on the loan recovery and therefore they have incentive to monitor the risk on a continuous
basis.
• Insurance and Risk Management Services. Insurance products have been designed to deal with rural
cash-cycles. There is recognition that in bad years, farmers may not be able to pay the insurance
premium.
Some accounts from villages include:
• Children are using computers for schoolwork and games. A particularly poignant story is that of
Khasrod, where 2,000 local students used the local e-Choupal to print their grade sheets, saving them
days of waiting and travel time.
• Sanchalaks use the Internet to chat extensively among themselves about the status of operations and
agriculture in their villages.
• Villagers access global resources to learn about agriculture in other parts of the world and are taking
action to compete in the world outside, not merely in the local mandi.
• Youngsters in the village use computers to research the latest movies, cell-phone models, and cricket
news.
Winners and Losers
Not everyone has benefited from the introduction of e-Choupals. Indeed, lost income and jobs is directly
connected to the overall increase in efficiency in the e-Choupal system. Some of the players in the
mandi system have suffered loss of revenue. They include:
• Commission agents. Despite ITC’s best efforts to maintain mandi volumes and compensate
commission agents for lost income, there is little doubt that on the whole they have lower incomes as a
result of the introduction of e-Choupals.
• Mandi laborers. The workers in the mandi who weighed and bagged produce have been severely
impacted by the drop in volume.
• Bazaars near the mandi. When farmers sold produce in the mandi, they would also make a variety of
purchases at local bazaars. This revenue has now been diverted to shops near the ITC hubs. This,
however, can be considered a diversion of revenue rather than elimination.
• Some mandi operations. ITC still pays mandi tax for all the crops procured through e-Choupals but it
now pays the tax to the mandi nearest to the procurement center. As a result, taxes are being diverted
from several mandis to the few mandis near procurement hubs. The result of this is that regional
mandis have lost taxes that contribute to maintaining their infrastructure.
• Competing processors. Even before the advent of the e-Choupal, the soya crushing industry suffered
from severe overcapacity (half of all capacity was excess). The efficiency pressures imposed by e-
Choupal have spurred industry consolidation.
Challenges
ITC has awakened the aspirations of farmers. If ITC fails to fulfill these aspirations, the farmers will look
elsewhere for satisfaction. As an example, in our conversation with a sanchalak about the potential for
Indian onions to succeed in the global market, he also understood what the key to succss was – better
seeds. He half-complained that he had told ITC several times to begin selling better onion seeds, but he
had not heard back from them. In a competitive environment, ITC would have to provide faster and
more responsive customer service to maintain its distribution system.
The computer in the village is no doubt revolutionary, but there is also no doubt that the villages we saw
were stratified to the point where not everybody can walk up to the sanchalak and ask to be shown the
computer. There are clearly some segments of village society, including the entire adult female
population that does not have access to the computer— although this may not be true in all regions.
The presence of the computer by itself will not transcend this barrier unaided. This is not a reflection on
ITC, but rather the nature of society in rural Madhya Pradesh. The solution might lie in observing where
the system has driven social change. Village farmers belong to many social and economic strata. Yet the
sanchalaks are servicing all of them equally. In this case, the potential for commerce has broken a
barrier that society has built. Similarly, engagement with poorer segments of society and women may be
possible through the active distribution of products tailored specifically to them.
Observing the success of e-choupal and its huge potential for setting up an electronic market, several
other players are also contemplating building portals and setting up of kiosks and operating e-choupal
kind of business model. Ruchi, the largest player in soyabean exports, has made a beginning with 15
villages. The Tata group too has stepped in with its own plans and that too with dual foray, one by the
Tata Chemicals the other by Rallis India. Both these Tata group companies have their own set of Kisan
Kendras, which total to around 200-plus across various villages. Tata Kisan Kendras (TKK) set up earlier,
have roped in the National Remote Sensing Agency (NRSA) for using its satellite imagery service, to be
known as ‘precision farming’. The service combines the use of information technology along with
satellite mapping techniques to advice farms to adopt farming practices that maximizes agricultural
yields. NRSA will supply to the TKK satellite images for soil patterns and crop distribution while the TKK’s
will in turn interpret the data and superimpose it on the digitized image of the village maps. Tata group
has also taken up farm management services at Chitradurga in Karnataka to support pomegranate
growers and according sources, plans are in the pipeline to undertake contract farming for fruits and
vegetables in Andhra Pradesh, wheat in Madhya Pradesh and Basmati rice in the northern states.
